Non-Physical Values and Methods for Their Determination.
In the published articles treating on the subject of valuation, much stress is laid on the intangible or non-physical elements of value. They have been termed "going concern values," "business values," "good will values," "franchise values," as well as "non-physical" and "intangible" values.
So much of the argument of many writers has been taken up with this phase of the question that it is impracticable to recapitulate the various arguments in support of giving these elements a place in the appraisal.
The writer cannot agree with those who would place any of these elements of value in the physical appraisal.
Value is given to a property, either by reason of the fact that it is an instrument for earning profit, or that it does earn profit or gives promise of profit. The actual investment of capital in a new plant is made with the expectation of earnings. It is not reasonable to attach as physical value, to such a plant, any value in excess of the actual investment. Nor does it appear to be any more reasonable, in the case of an old plant, to assign arbitrary and fictitious values over and above the actual investment remaining in the plant, unless such values are justified and supported by actual earnings in excess of such a rate of interest on the money invested, as it would earn if invested in some non-hazardous security, and—carrying out the clearly-expressed idea of the Courts—such intangible value can only accrue when the rates charged for the service are fair and proper.
The capitalist seeking investment bases his ideas of value on:
(a) The market price of stocks and bonds, an estimate of worth based primarily on actual earnings of the property, but affected to some extent by outside conditions; or
(b) On the capitalized net income, or actual earnings, of the property; or,
(c) In the case of a new property, on an estimate of what the probable earning capacity of the property will be, where the business is more fully developed.
Methods (a) and (b) ignore cost of construction, or present investment in physical property, and base a value on past performances. Method (c) is based purely on hypothetical earnings, but the only real measure of value in this instance is the actual amount of capital that has been invested.